In a rapidly changing and ever more litigious global tax environment, the number of international tax disputes has exploded.
Sweeping and extensive changes to national and international rules have been introduced in recent years, many of which are complex and difficult for businesses to navigate. The introduction of diverted profit tax in the UK and the implementation of base erosion and profit shifting (‘BEPS’) action plans by the OECD are just two examples.
Typically, HMRC’s challenges to transfer pricing have mostly focussed on large businesses, but mid-sized businesses are also increasingly the subject of scrutiny. The Freedom of Information request reported in the Financial Times on 19 July 2020 confirmed that “HMRC challenged large UK businesses about liabilities totalling £20bn in 2019 – up sharply from £12.7bn in 2015”. As transfer pricing enquiries multiply, HMRC is now working to improve the effectiveness of these enquiries - for both taxpayers and HMRC - with discussions taking place with transfer pricing practitioners to help HMRC render the enquiry process more efficient and transparent.
Following the enormous sums of money injected by the Government during COVID19 to keep the economy afloat, in the absence of a magic money tree the Government will now be looking to replenish funds via taxation. Even before the impact of COVID19, the Government were already looking to replenish their income stream, through tax changes such as the ten-fold reduction in the Capital Gains Tax Entrepreneurs’ lifetime limit from £10M to £1M which was brought in on 11 March 2020.
There are two routes the Government could take to collect additional revenue:
The first route would be to intensify their scrutiny on large multinationals. This would kill two birds with one stone, as tax authorities are under enormous pressure to collect additional revenues on the one hand and tackle tax avoidance (whether actual or perceived) on the other. This route therefore seems an easy and efficient choice, with the additional benefit of promoting good PR, in the face of ever-increasing domestic political pressure to punish the perceived wide-spread exploitation of tax rules, and close what are often described as “tax loopholes”.
Even before the COVID19 pandemic, we have already seen a surge in scrutiny with increasing numbers of diverted profit tax and transfer pricing enquiries on very detailed and technical matters. There has also been an obvious and increasing focus on the enforcement of tax governance obligations. We are rapidly approaching the third anniversary of the introduction of the Corporate Criminal Offence (‘CCO’) legislation and HMRC has confirmed that it has 9 investigations on the go and 21 further “opportunities under review” across all businesses’ sizes and sectors.
The CCO legislation has no ‘de minimis’ level and HMRC expect it to be applied by every business, large or small. The aim and aspiration are for HMRC to see every business adopt a zero-tolerance policy to the facilitation of tax evasion embedded throughout the entire business, from top to bottom. In the same vein, HMRC seems now ready to use the Senior Accounting Officer (‘SAO’) regime, along with the requirement for larger businesses to publicise their tax strategy, as a means to holistically scrutinise a business’s tax governance. In this context, holistically does really mean looking at everything – from the most basic systems and processes through to transfer pricing, CCO, Coronavirus Job Retention Scheme and as a risk assessment tool in general. And whilst the entry into force of the new EU-wide regulatory requirement to report cross-border tax arrangements (‘DAC6’) was deferred by six months, it is now fully back on course, adding yet further to the compliance burdens.
The second route, trickier to embark on for the Government but one nonetheless they might well pursue, would be to create a new tax. Whilst we won’t pretend to have a crystal ball, press speculation has suggested yet another attempt at a wealth tax or possible increases to the rates of existing taxes (e.g. Capital Gains Tax, again widely reported in the press). Taxpayers will rest assured that, save for an economic recovery of miraculous proportions, a new tax or an increased tax implemented by the current Government would be unlikely to be removed by the next Government.
Our prediction is that the Government will take both routes to ensure their coffers are being filled again.